Bankers in crucial talks to prevent default by Greece

EFFORTS TO prevent the looming threat of a Greek default will resume in Athens today as global banks return for fresh talks on how to break the deadlock over the second Greek bailout.

The rush to bring the Greek government and global banks together again, just five days after negotiators broke off talks on a private-sector contribution to the plan, underscores mounting anxiety over the threat of a default.

Separately, better than expected inflation data for the euro zone led some commentators to suggest the European Central Bank has more leeway to cut interest rates to prevent a slide back into recession.

Annual inflation in the 17-nation bloc was 2.7 per cent in December, not 2.8 per cent as the EU’s statistics office, Eurostat, had originally reported.

EU leaders have made the second EU-IMF rescue of Greece conditional on a big “haircut” for the banks and investment funds that hold Greek bonds, but seven months of negotiation have proved fruitless.

“Obviously we’re in a very important moment. It’s very important politically, it’s very important for markets and it’s very important for Greece,” said an adviser to a participant in the talks.

The resumption of talks between Greek prime minister Lucas Papademos and the leaders of the Institute of International Finance (IIF) banking lobby comes against the backdrop of renewed street protests in Athens over the country’s austerity programme.

As thousands of workers marched on parliament, officials from the EU-IMF “troika” started to examine the government’s books in an effort to stitch together a new €130 billion loan plan.

The process is crucial for EU leaders, who are struggling to convince sceptics that their rescue plan for the euro zone is viable.

Markets have largely shrugged off a mass downgrading of euro zone countries by Standard Poor’s.

While the European Financial Stability Facility was downgraded by SP on Monday night, it conducted a successful auction of €1.5 billion short-term debt and attracted bids for more than three times the amount of money it raised.

Spain sold €4.88 billion at a considerably lower rate than in a comparable sale last month, and Italian borrowing costs also declined.

Although European share prices reached their highest level for more than five months, European officials acknowledge that the turmoil could flare up again at any moment.

German chancellor Angela Merkel has spurned a demand from the IIF to intervene in the Greek talks, pressuring both sides to go back to the table themselves. However, all sides complain of brinkmanship.

The talks are being conducted for the IIF by its managing director, Charles Dallara, and Jean Lemierre, special adviser to the chairman of BNP Paribas.

At issue is the interest rate on new bonds Greece will offer in a debt exchange designed to reduce its overall indebtedness by some €100 billion.

Although EU leaders resolved in October to pursue a voluntary 50 per cent loss on privately held debt, the banks have countered that they may lose as much as 80 per cent of the net present value of their investment.

Greece and its EU-IMF sponsors want the deal done in time to ensure the country does not have to fully repay a €14 billion bond due on March 20th, but weeks of preparatory work are required.

Any failure to reach an agreement could see the country run out of cash, prompting an uncontrolled default with potentially catastrophic consequences for the euro zone at large.

Rating agency Fitch said Greece was insolvent and likely to default, although it expects that to take place in an orderly way.

“It is going to happen. Greece is insolvent so it will default,” said Edward Parker, a Fitch managing director. He told Reuters that would not come as a surprise but argued against any unplanned default.

“That, would be, for us, the really damaging situation, but one which we are certainly not expecting to happen because, clearly, in a rational situation you would think Greek politicians and European policymakers would ensure that it doesn’t happen.”